Aug. 17 (Bloomberg) -- Canada’s dollar fell versus its U.S.
counterpart as an unexpected drop in manufacturing sales added
to signs the nation’s economy is lagging behind that of its
biggest trading partner.

The currency dropped this week versus most major peers
while the U.S. dollar climbed as American economic data
bolstered bets the Federal Reserve will start slowing stimulus
as soon as next month. Retail sales in Canada declined for the
first time in three months in June, a report next week is
forecast to show. Yields on Canadian government 10-year bonds
climbed to the highest level in two years.

“The path of least resistance for the Canadian dollar has
been weakness as data that has come out from Canada has
generally been on the disappointing side, especially when
compared to the U.S., and as we get closer to Fed tapering,”
said David Tulk, chief macro strategist at Toronto-Dominion
Bank’s TD Securities unit, by phone from Toronto. “As the U.S.
dollar strengthens, Canada is getting caught in the crossfire.”

The loonie, as the currency is nicknamed for the image of
the aquatic bird on the C$1 coin, depreciated 0.5 percent to
C$1.0336 per U.S. dollar this week in Toronto. One Canadian
dollar buys 96.75 U.S. cents.

Yields on Canada’s benchmark 10-year bonds climbed as the
securities’ prices fell for five straight days, the longest
stretch since June. The yields climbed 23 basis points, or 0.23
percentage point, to 2.70 percent and touched 2.74 percent, the
highest since July 2011. The price of the 1.5 percent debt due
in June 2023 lost C$1.82 to C$89.72.

Record Drop

Foreign holdings of Canadian bonds fell by a record in June
as investors retained the proceeds of maturing government
securities, Statistics Canada reported yesterday. The C$19
billion ($18.4 billion) decline in the category was led by a
C$10.6 billion drop in government-issued debt and another C$8.83
billion reduction in government-owned company bonds.

Canada’s currency has lost 0.7 percent this year against
nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The U.S. dollar has advanced 3.9 percent,
while the euro gained 5.1 percent.

The loonie traded in a one-cent range this week, between
C$1.0370 and C$1.0281, amid speculation the Fed will begin
slowing monetary stimulus soon.

U.S. central-bank officials have been discussing when to
begin tapering the pace of their $85 billion in monthly bond
purchases under the quantitative-easing strategy amid an
improving economy. The purchases, designed to put downward
pressure on borrowing costs and spur economic growth, tend to
devalue the greenback.

Driving Dollar

The dollar rose this week against 13 of its 16 most-traded
counterparts tracked by Bloomberg.

“The tapering story is the driver for the dollar, and it’s
whipping around the loonie as well,” said Adrian Miller,
director of fixed-income strategies at GMP Securities LLC in New
York. “The longer-trend story for the loonie, through the end
of the year, is still weakness. The Canadian economy is going to
lag the U.S, and that means underperformance for the loonie.”

Canada’s currency slid versus most major peers yesterday
after the nation’s statistics agency reported factory sales fell
0.5 percent in June to C$48.2 billion. Economists in a Bloomberg
survey forecast a 0.3 percent increase. It was the third decline
in four months, and brought the drop in manufacturing sales over
the past year to 3.7 percent.

Further Softening

“The currency is likely to continue to soften,” Doug
Porter, chief economist at the Bank of Montreal, said yesterday
by telephone from Toronto. “The manufacturing-sales number
reinforces the point that June was a weak month for the
economy.”

The data followed a report Aug. 9 that showed Canada
unexpectedly lost 39,400 jobs in July. A Bloomberg survey
projected a gain of 10,000.

Canadian retail sales fell 0.4 percent in June from a month
earlier, economists in a Bloomberg survey forecast before data
due Aug. 22. Sales climbed 1.9 percent in May, the fastest pace
in three years.

The nation’s gross domestic product will grow 2.4 percent
in 2014 after gaining 1.7 percent this year, according to the
median forecasts in a Bloomberg survey of economists. The U.S.
economy will expand 2.7 percent, after growing 1.6 percent in
2013, a separate survey forecast.

Economic Data

U.S. retail sales rose in July for a fourth consecutive
month, gaining 0.2 percent after a 0.6 percent increase in June,
the Commerce Department reported on Aug. 13.

New-home construction in America rose 5.9 percent to an
896,000 annualized rate from a revised 846,000 pace in June that
was higher than previously reported, department data showed
yesterday. A measure of employee output per hour increased at a
0.9 percent annualized rate, after a 1.7 percent decline in the
first quarter, Labor Department data showed.

The Canadian currency’s losses were tempered by a European
Union report Aug. 14 showing the 17-nation euro-area economy
emerged from a record-long recession, rising 0.3 percent in the
second quarter.

The data, which followed reports last week showing
increases in Chinese imports, exports and industrial production,
added to prospects for global economic growth and Canada’s
commodity exports.